A Call That Needs To Go Through… MCI WorldCom‐​Sprint

This article was originally published by Bridge News.
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On Oct. 5, William Kennard, chairman of the Federal Communications Commission, greeted the news of the planned $115 billion merger of MCI WorldCom and Sprint with skepticism.

"Competition has produced a price war in the long distance market,"Kennard said. "This merger appears to be a surrender. How can this be goodfor consumers?"

Regulators and consumer groups can relax. Mergers let companies cutcosts and offer new services in the United States and around the world.Regulatory restrictions on telecom mergers protect the status quo, notconsumers.

Why have there been so many telecommunication mergers in the last fiveyears?

The Telecommunications Act, passed by Congress in 1996, broke down someof the obsolete legal barriers between local phone service, long distancephone service and cable television.

Regulation had frozen the industry as it was in 1984, after the breakupof Ma Bell, the old AT&T before it was dismantled by court order. The paceof competition and innovation was glacial. It's only natural that aregulatory thaw would bring big changes.

U.S. companies are competing in a global marketplace with giants likeGermany's Deutsche Telekom and Japan's NTT.

Until the recent spate of mergers, AT&T was almost alone among U.S.companies as top global players. Now that Bell Atlantic and GTE havemerged, the newly formed company ranks among the largest global players.So will the just-approved merger of SBC Communications and Ameritech. Sowill MCI and Sprint.

These companies are now big enough to begin to invest the trillions ofdollars it will take to build global communication networks.

Why should we want to preserve a world of limited competition among thelargest players? Mergers mean one company where before there were two.Does that harm competition? Not necessarily. Competition can work evenamong just a few companies in a market.

Early in the history of the automobile, there were many small carcompanies. Over time, the industry consolidated.

Yet competition in the auto industry is hardly suffering, even thoughthere are few new entrants in the car business compared totelecommunications. Ford, General Motors and Chrysler compete vigorouslywith Toyota, Isuzu, Nissan and others.

The greatest threat to competition came from regulators, who tried foryears to protect domestic automakers from foreign competitors. The outlookfor competition in long distance phone service is even more promising thanin the automobile industry.

Some commentators believe MCI and Sprint alone were never really bigenough to challenge AT&T's large market share in the long distancebusiness. Perhaps only now will we see real competition.

Better yet, former Bell companies are poised to enter long distancemarkets, as intended by the telecommunications legislation. The only holdupis the FCC review process.

The Internet continues to exert downward pressure on phone prices.John Chambers, chief executive of Cisco Systems in San Jose, Calif., isfond of predicting that eventually "voice will be free," meaning thatcompanies will kick in free telephone service when you buy Internet or dataservices.

Meanwhile, the old wire-based networks of copper and cable are beingshaken up by the new wireless entrants.

Over the past few years, many old-fashioned wire-based companies havegrown on average only very slowly, with rates of growth ranging from zeroto 7 percent.

Meanwhile, wireless technology is growing by leaps and bounds. Throughwireless and mergers, the tidy geographic territories carved out byregulators for local phone monopolies are breaking down. Every surprisemerger shakes up those monopolies a little more.

So what do mergers mean for prices? Merged companies can take theircost savings and invest them in new services or networks, benefitingconsumers in the long run. Or they can hold prices the same and increaseservice quality.

No one knows if a merged MCI WorldCom-Sprint would lower prices in theimmediate future, but given the competitive picture, they'll hardly beable to raise them.

The FCC's ponderous and uncertain merger review process should beabandoned. Forcing U.S. phone companies to stay small hurts globalcompetition.

The best route to healthy national competition is to free local phonecompanies to compete in long distance. Regulatory uncertainty, like thesort displayed by the FCC, chills investment and adds risk to long-termbusiness plans.

Consumers do not need protection from mergers, the economic benefits ofwhich are well-recognized. Holding back such changes simply hold back theongoing telecommunications revolution.